Fiscal Cliff Optimism

I'm not the only one who thinks the fiscal cliff deal was a good thing.

David Henderson begins his thoughts on the deal by saying, "Pssst: Someone tell the Republicans they won." Like me, Henderson compares the deal to what would have happened without it, rather than some ideal version that never would've passed the Senate. Henderson, however, goes into far more detail than I did.

Among the many negative responses to Henderson's post I've seen, only Bob Murphy seems to understand that it's the baseline that matters--that is, what would have happened without the deal (even though Murphy still disagrees with Henderson).

Yuval Levin at NRO (ht) approves of the deal for political strategy reasons. He says, "For liberals, this was not a moment of danger to be minimized but by far their best opportunity in a generation for increasing tax rates," and they got far less than they could have just by doing nothing and going over the cliff. "Having discovered an effective political wedge in the tax debate, the Democrats have now basically used it up and gotten awfully little in return."

Finally, if you're still not convinced that the deal was a good thing, take a look at the latest newsletter from the Socialist Equality Party. The self-described socialists hate the deal. In the opening paragraphs, the author echoes Levin's observations on political strategy. In the 7th paragraph, he gives a list of reasons to hate the deal that pretty closely mirrors Henderson's reasons for liking it. If it's that bad for the socialists, it has to be good for the rest of us.

The Fiscal Cliff and Opportunity Cost

I keep seeing conservative laments about the fiscal cliff deal, like this one, which sums up a bunch from Twitter. There are far too many to link to, but so far, every single one that I have seen has ignored the economic principle of opportunity cost.

Conservatives are upset that taxes are going up and spending won't be seriously cut. But when we look at the opportunity cost for this fiscal cliff deal, we can't just look at some pie-in-the-sky "deal" where the Democrats roll over and give conservatives everything we want. We have to look at the reality of what would have happened without the deal. And the reality is, without the deal, taxes would have gone up twice as much ($478 billion compared to $220 billion), and we would've seen a spending cut that's a measly 0.3% of federal outlays.

I know this isn't how the deal is being portrayed in the media, but these are the facts. Republicans gave the Democrats $9 billion in higher spending, and got $250 billion in lower taxes, compared to what would have happened without the deal. To me, that looks like a win.

A final note on the sequester: Most of the supposed sequester cuts would not have happened for years in the future anyway. If you believe future Congresses would have abided by the sequester, then you're in luck. The sequester is still going to happen, just two months later. If you think that two month delay is a sign that the sequester will never happen anyway, I think you're right. It was never going to happen in the first place, and we lose nothing by delaying it.